2/23/2010 @ 11:21PM

Airlines Can Offer Lessons For Online Newspapers

Online newspapers face two seemingly insurmountable challenges: getting customers used to paying for content and getting the industry used to charging for it. But in fact airlines have faced a similar, albeit simpler, situation with respect to baggage.

Checking in baggage was once free, but the industry has now converged on a common solution. When fuel costs spiked in 2008, none of the large air carriers wanted to be the first to charge for checked baggage. Few noticed when the low-cost carrier Spirit Airlines began demanding a fee for the first bag in June 2007. Nearly a year later in May 2008
American Airlines
–one of the “majors”–announced it too would charge for the first checked bag. Before the end of summer, five of the seven largest North American carriers followed suit. Why did American Airlines’ decision produce such a quick following? Because airlines are adept at interpreting each others’ signals.

Is a similar industry shift–charging for a service that was once free–surfacing in the online news business? After months of speculation, The New York Times recently announced it would implement a new payment system. Despite a few early chargers (e.g., The Wall Street Journal) the vast majority of online news is provided freely to the public. Many newspapers would like to charge for content, but no one wants to be the odd paper out and make the first move.

In the academic parlance of game theory, this is called a coordination problem, and it occurs repeatedly in countless industries. Coordination problems occur when two or more parties can realize mutual gains by making the right set of decisions, but everyone may be worse off if the group fails to coordinate. Feeling the pinch of high fuel prices, the airlines needed a way to explicitly charge customers who chose to carry more baggage. If others didn’t follow, the first major airline to institute checked bag fees risked bad publicity and the loss of customers to rivals. So how do firms resolve this coordination problem?

They publicly communicate their reasons and strategic intentions. When American made the announcement, the CEO of AMR Corp., its parent company, made a statement that was published by USA Today on May 1, 2008, wherein he said that the industry cannot withstand sky-high oil prices and must find ways to cover rising costs. That same day, USA Today quoted a spokeswoman for United Airlines that said the firm was “seriously studying” a similar fee. Management at the other airlines read those comments, and likely wondered why, if two major firms backed the new fees, their company shouldn’t do the same?

As more airlines announced similar policies, the signal to others whom have yet to follow becomes stronger. When firms appear to informally cooperate without having explicit agreements, economists call this tacit collusion. Although airlines’ practices have sometimes gone beyond what antitrust law permits, the Supreme Court concluded in Brooke Group, Ltd. v. Brown & Williamson Tobacco Corporation (1993), that tacit collusion is not in itself unlawful.

In the world of newspapers, the papers must first get at least some of their readers used to the idea of paying for online content. This can only be accomplished if enough news sources adopt hybrid paid/ad-supported models. The NYT, as a pillar of industry, is in a unique position to help lead the charge to charge. Arthur Sulzberger Jr., chairman of Times Co. and publisher of the Times, was quoted in The Wall Street Journal on Jan. 21, 2010, voicing his long-term support for such a strategy. He said, “…we don’t see this as a financial game changer…this is more about where we think the Web is going.”

Other news outlets need to be convinced that a dual revenue model is viable for them, since most do not have the user base and brand of the NYT. In postponing implementation of its paid system until January 2011, the NYT provided industry members with a chance to investigate the matter, and, perhaps, to eventually adopt it. Airlines employ a similar tactic: pre-announcements of policy changes allow firms to follow a wait-and-see strategy without having to prematurely commit.

The second challenge is helping smaller news outlets implement paid-content systems. The NYT has the resources to plow into developing the right payment model and software. Others’ pockets are not so deep. Once implemented, the industry will collectively benefit from the NYT’s toils. The Newspaper Association of America also took a leading role when, in June 2009, it announced a request for paid-content proposals. Eleven companies responded, including
Google
and
Microsoft
. Third-party payment system, already vetted by the NAA, could help give confidence to smaller firms to make the shift.

No one likes to start paying for something that used to be free. Many people got used to downloading pirated music for free online. But now many have grown accustomed to paying for it through iTunes. Other online music revenue models have started to succeed. Pandora, a free online radio service, just had its first profitable quarter using a dual paid/ad-supported model. Online news doesn’t have to be different, but the situation is certainly more complicated. The longer consumers get used to free online news, the harder it will be to eventually move to a different model. The industry’s choices now could shape their business model for years to come.

Brett Gordon teaches pricing strategy in the MBA and executive MBA programs at Columbia Business School, where he is assistant professor, marketing. His research focuses on competitive pricing, dynamic oligopoly, product innovation and replacement, new product development and design, and market structure.